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Traders eye reverse diesel arb to US as cold bites: sources

London — The bedding in of winter in the US coupled with European weakness hasdiesel traders eyeing up the reverse diesel arbitrage, according to sources.

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Ordinarily the US exports diesel to European markets, but recent strengthin the NYMEX heating oil contract, one leg of the HO-GO spread used to measurethe relative strength of US and European diesel, has flipped the customarydynamics.

The front-month HO-GO spread settled Thursday at 13.77 cents/gal, edgingoff the month high of 14.02 cents/gal reached Wednesday, according to ICEdata.

The spread has been driven by cold weather in the US increasing demandfor heating oil.

"Looks workable to me," a source said on the arbitrage to the US. Dieselcould also find homes in Latin America, he said.

Others said the arbitrage was teetering on the edge of being open,facilitated by a weak CIF NWE market.

However, solid fixtures for vessels have been few and far between so far.

The HO-GO is the principal reason behind the opening arbitrage despite USGulf Coast differentials are near their lowest levels for the year.

US Gulf Coast material is effectively barred from entry into the USAtlantic Coast low sulfur heating oil market by virtue of limited pipelinespace and the Jones Act making seaborne US-to-US cargoes prohibitivelyexpensive.

--George Shaw, george.shaw@spglobal.com

--Edited by Jonathan Fox, jonathan.fox@spglobal.com